Only two things are certain about being atop the renegade mustang that is the beef industry's new value-based economy: the scenery will change fast, and information is the only extra handhold available.
"You can't ever know too much about your cattle," says Paul Hitch, president and chairman of Hitch Enterprises, Guymon, OK, one of this nation's largest cattle-feeding outfits. "Even if you're not retaining ownership, it behooves you to find out about your cattle because I'm going to know what they do. If they don't perform, I won't be back."
And, Hitch has plenty of company. He is also chairman of the board of directors for Consolidated Beef Producers Inc. (CBP), a new cooperative of about 40 Texas, Oklahoma, New Mexico and Kansas feedlots that have already committed 936,500 head to its negotiated-base pricing grids starting next year.
Now, add to CBP's cattle - two-thirds of which represent cattle currently trading in the cash - at least 3.5 million head that traded through grid and branded programs last year. Next, tack on the numbers tossed around by new, silent or expanding value-systems and the number of cattle trading away from the cash markets. The number of cattle that buyers are discovering specific information about could quickly double from the 35% of all fed cattle USDA reported as trading outside cash markets in 1999.
In fact, one Texas Panhandle feedlot manager recently remarked that the transition to value is occurring so rapidly that anyone looking to buy cattle this fall with the notion of selling them in the cash next year had better be buying them way back of the market.
Driving The Value Wedge "I think the industry is in a state of great transition, and Consolidated Beef is just one example of that," explains Hitch.
CBP, like many other value discovery systems, has grown from producer frustration with how the industry values cattle.
"In my mind, the cash market is withering away," says Hitch. "Today, you'll sell 63,000 head of cattle in an hour, and they'll all bring 66›. We all know it's not possible all of those cattle are worth the same money."
Actually, producers are not only fed up with averages. Some are also concerned about current grid-pricing systems that seek to reward and discount cattle based upon true value, but start with a base price that is tied, one way or another, to the cash market price.
"It's apparent to me that the cash trade in live cattle (localized cash prices) has declined for several years now, relative to futures and wholesale beef prices," says Ted Schroeder, a livestock economist at Kansas State University (KSU).
For perspective, he and fellow KSU economist James Mintert found that western Kansas fed steer prices were typically 90-95% of the wholesale value during the early '90s. From 1996 to 1999, however, live animal values generally ranged from 80-90% of wholesale values and even dropped below 80% at one point.
At least in part, Schroeder believes cash market decay stems from the fact that more homogeneous cattle are being traded in value systems, leaving fewer heterogeneous cattle to determine the cash price.
In fact, Clem Ward, professor and Extension economist at Oklahoma State University, believes at some point cash cattle prices will go the way of the dinosaur and the live bird prices the poultry industry once used.
Hedging The Future Even though it comes with its own set of challenges, Ward says, "I've been arguing that we need to go the wholesale market and use it as the center of price discovery." In the meantime, he believes negotiating the base price for grids is a step in the right direction.
With CBP, Hitch explains, "We've told the packers: `We presume the grids you put up accurately reflect the cattle you want and the cattle you don't want. What we want to do is give you the cattle you want and not give you the cattle you don't want. We want to be able to deliver the right cattle to the right plant at the right time.'"
But, CBP also wants to start with a negotiated price. They hope the numbers they bring to market each week will give them the leverage to do that, as well as dilute the added transaction cost that accompanies negotiated pricing.
Of course, switching gears from, "Buy low, sell high and keep the overhead down," to the simple charge, "Know your cattle or go home," is easier said than done.
"We're talking about a very big industry with a lot of players, a lot of vertical segmentation, and it's an immense problem," explains Ward.
Whichever direction the mustang jumps, though, Ward says, "You need to know how your cattle perform because someone else is likely to know what your cattle do, and it gives them a competitive advantage if they know more about your cattle than you do."